Requirements Of A Reverse Mortgage
A reverse mortgage is generally a type of FHA loan, called a, “HECM loan,” While some lenders offer proprietary reverse mortgages, most of these loans are offered by lenders who use the HECM program through the FHA. When considering a reverse mortgage, consider focusing on programs that are FHA-insured and must adhere to federal guidelines. With non-HECM reverse mortgages, you could lose important consumer protections, and you wont be guaranteed the uniform requirements provided by the FHA.
In order to qualify for a reverse mortgage:
- You must be at least 62 years of age.
- You must live in the home as a primary residence.
- You must not be delinquent on federal debt.
- You must be able to keep paying taxes, insurance, and other costs.
- The property must meet FHA requirements.
You can choose to receive your payments as long as you live in the home, or you can set up a set term to receive payments. Its even possible to use a line of credit for your reverse mortgage. No matter what type of payment setup you choose, you cant be forced to sell your home to pay off the mortgage, and you wont have to make payments until you no longer live in the home.
Given this information, a reverse mortgage might seem like a slam dunk, and there are situations in which a reverse mortgage makes sense. However, there are some drawbacks to reverse mortgages that can cause financial harm to some retirees.
Buying A Vacation Home
However, the new rules haven’t eliminated one of the more unusual uses for a reverse mortgage and that’s to buy a new home entirely. For example, it’s possible to use the proceeds from a reverse mortgage to buy a vacation property or second home, as there are no restrictions on how you use the funds. In another twist, in some cases you can even use a reverse mortgage to buy a new primary residence and not have to make monthly mortgage payments. Here are a couple example of how they work.
Clients of Sean McGeehan, a mortgage loan officer in Homer Glen, Ill., cashed out about $200,000 with a reverse mortgage on their home in Illinois that they owned free and clear so they could pay cash for a vacation home in the Cayman Islands, McGeehan says.
The couple, in their early 70s, had been vacationing there for 10 years and always wanted to buy a home there, figuring it was cheaper than renting for a month or so every year, he says. Also, financing a home purchase in the Cayman Islands is difficult if the buyer doesn’t live there, so getting a traditional mortgage was out of the question, he says.
“They just wanted to be able to use their money now and enjoy it, and not let it sit in their house” McGeehan says.
Most people use reverse mortgages to help pay living expenses because they’re broke, McGeehan says. Another popular use is for long-term care insurance.
Am I Required To Make Monthly Payments On A Reverse Mortgage
No. Monthly payments are not required however, you are always allowed to make payments if you wish. Some people like to make interest-only payments so the balance owed stays smaller, and others make full payments, but that is completely up to you. When the last borrower leaves the home, or if the loan requirements are not met, full repayment is then required.
Read Also: Can You Refinance Mortgage Without A Job
Who Is An Hecm For Purchase For
Anyone 62 or older who meets the reverse mortgage requirements can get a reverse mortgage purchase loan. However, this product is especially good for retirement-age borrowers who want to rightsize into a new home, move closer to family, or who are going through a divorce and plan to move out of their current house.
Lets say youre 65, recently retired, and the owner of a 4-bedroom, 2.5 bath home worth $350,000 in the Upper Midwest.
Perhaps you love your home, but youre ready to move somewhere warmer and into a home that requires less maintenance. You decide a two-bedroom condo costing $300,000 may do nicely.
Of course, you could also pay the full $300,000 purchase price in cash. After all, you just sold your $350,000 home. Why not own the new property outright?
Reverse Mortgages Your Spouse And Heirs
Both spouses have to consent to the loan, but both dont have to be borrowers, and this arrangement can create problems. If two spouses live together in a home but only one spouse is named as the borrower on the reverse mortgage, the other spouse is at risk of losing the home if the borrowing spouse dies first. A reverse mortgage must be repaid when the borrower dies, and its usually repaid by selling the house. If the surviving spouse wants to keep the home, the mortgage loan will have to be repaid through other means, possibly through an expensive refinance.
Only one spouse might be a borrower if only one spouse holds title to the house, perhaps because it was inherited or because its ownership predates the marriage. Ideally, both spouses will hold title and both will be borrowers on the reverse mortgage so that when the first spouse dies, the other continues to have access to the reverse mortgage proceeds and can continue living in the house until death. The nonborrowing spouse could even lose the home if the borrowing spouse had to move into an assisted living facility or nursing home for a year or longer.
Alternatives To A Reverse Mortgage
While a reverse mortgage may not work for your situation, don’t give up hopeâit’s not your only option for generating cash or saving money. Here are four alternatives:
Assets Debt And Death
When a person dies, much of the time their assets must go through probate. Probate is the legal process for distributing assets according to the will left by the deceased person. However, debts the person had must be paid before the assets can be distributed.
If the person had a small estate and significant debts, the assets may need to be sold to pay off the creditors. If they had enough liquid assets, such as bank accounts, the other assets may not need to be touched for debt payment.
Once the debts have been paid, the remaining assets are left to the heirs. When a house is involved, it may be sold to divide the profit between the heirs, or the will may have stipulated that one heir gets the house. The title would be transferred to the name of the heir chosen.
Read Also: Is Closing Cost Part Of Mortgage
Can You Use A Reverse Mortgage To Buy A New Home
Reverse mortgages are popular among seniors. Through the Home Equity Conversion Mortgage Program, retirees can turn their home equity into a monthly source of income without moving out of their houses. And with their extra cash, seniors can remodel their homes and pay for their living expenses. If youre interested in buying a new home in retirement, a reverse mortgage can cover the cost of that, too. Thats where the HECM for Purchase Program comes into play.
Check out our mortgage calculator.
You’ll Have Regular Income During Retirement
As long as you remain in the home, using it as your primary residence, you can receive regular income during retirement. For some retirees, who struggle to meet their living expenses, this can be a big help.
How much you can borrow to meet these expenses depends on the age of the youngest borrower, current interest rate, and the value of the home. How much equity you have in the home is considered if you have only paid-down a considerable amount rather than owning the home outright, according to the FHA.
With a reverse mortgage in place, you can choose to receive equal payments for the remainder of your lifeor as long as you live in the home. Alternatively, you can decide to get those payments for a set periodrunning the risk that youll outlive the payments and not have enough income.
There are also payment arrangements that include a line of credit, allowing you to take the money as needed.
However you decide to do it, though, the bottom line is that you end up with access to income during retirement, which can supplement your other retirement resources.
Recommended Reading: Are Mortgage Discount Points Worth It
Avoid These Mistakes When Selling A House With A Reverse Mortgage
Though youre free to sell your home whenever you want, its not always a great idea when a reverse mortgage is involved. You want to be strategic about the sale whenever possible.
A few mistakes to avoid include:.
Selling too soon. Interest, closing costs and other fees can take a big bite out of your equity. If you sell your home within a few years of getting a reverse mortgage, you likely wont have time to build up enough equity to enjoy a profit once the loan is repaid.
Selling when your home value has fallen. You wont have to worry about coming up with the difference if your homes sale price falls short of what you owe. On the other hand, selling when you are underwater on your loan guarantees that youll walk away with nothing after the sale.
Not sticking to the plan. As mentioned above, you could face legal issues or foreclosure if your lender thinks youre stalling for time and not actively marketing the sale of your home. The same is true if you fail to adhere to deadlines outlined in your contract. Its important to understand the terms of your reverse mortgage and work on selling your home according to those terms to avoid costly issues.
What Fees Can My Lender Charge Me
With respect to reverse mortgages under New Yorks Real Property Law sections 280, or 280-a, lenders may only charge those fees authorized by the Department in Part 79.8. All costs and fees must be fully disclosed and reasonably related to the services provided to or performed on behalf of the consumer. Specifically, a lender may charge the following fees, among others, in association with a reverse mortgage loan:
- An application fee
Buying A Home With A Reverse Mortgage
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
You cant blame senior adults who are wary about buying a new home. After years of work, they might not want to be tied down to a long-term mortgage. Or they might be hesitant to take on a new monthly payment that could strain an already tight budget.
However, there is a lesser-known way to buy a home as a senior adult that addresses some of these concerns. You can actually use a reverse mortgage to buy a new home and you wont have to worry about making payments each month.
What Are The Differences Between A 280 280
In New York, there are two types of reverse mortgage loans available to senior borrowers. The first, referred to as a HECM reverse mortgage , is a mortgage loan that is made in accordance with the requirements of the Home Equity Conversion Mortgage program operated by the Federal Housing Administration. HECMs are the only reverse mortgages insured by the Federal Government. The second, referred to as a proprietary reverse mortgage, is a mortgage loan that is made in accordance with the requirements of New Yorks Real Property Law Section 280, or 280-a. Part 79 applies to both proprietary and HECM reverse mortgage loans.
The most important distinction between a HECM and proprietary reverse mortgage concerns the maximum loan amount available under each type of loan. Under the HECM program, the maximum loan amount is capped. Proprietary reverse mortgages, on the other hand, do not have a cap. It is for this reason that they are often referred to as jumbo reverse mortgages.
Don’t Miss: How 10 Year Treasury Affect Mortgage Rates
How Can I Receive My Reverse Mortgage Money
There are four options for how to receive your funds, and you can make changes to these once your accouunt is established:
When Is The Hecm For Purchase Due
Although there is no specific date in which the HECM for Purchase loan is due, a few events can cause the loan to become due and payable. The following are such events that would cause loan maturity:
- The last remaining borrower or non-borrowing spouse passes away or leaves the home to live elsewhere for more than 12 consecutive months.
- The home is sold.
- You do not meet the borrower obligations of maintaining payment of property taxes, homeowners insurance, homeowners association fees, and basic home repairs or you fail to comply with other loan terms.
How Home Equity Release Works
‘Equity’ is the value of your home, less any money you owe on it .
‘Home equity release’ lets you access some of your equity, while you continue to live in your home. For example, you may want money for home modifications, medical expenses or to help with living costs.
Ways to access equity in your home include:
- reverse mortgage
- home sale proceeds sharing
- equity release agreement
- the Government’s Pension Loans Scheme
The amount of money you can get depends on:
- your age
- the value of your home
- the type of equity release
Your decision could affect your partner, family and anyone you live with. So take your time to talk it through, get independent advice and make sure you understand what you’re signing up for.
Six Steps Advocates Say Would Curb Reverse Mortgage Foreclosure
After a borrower dies, heirs often find themselves confused or hostile that a lender is “ripping them off,” said Mathius Marc Gertz, a broker at WestCal Mortgage Reverse, who counsels families to work out a plan while their parents are still alive.
“I advise adult children to ask their parents: ‘Do you have a reverse?’ and get involved on what your procedure will be to pay it off, either by getting a date-specific payoff amount or deciding on who will list the property to sell it,” Gertz said. “A high percentage of cases hit snags, but that’s because people are reactive and it becomes a big bugaboo.”
Is It True I May Actually Buy A New Or Different Home Using A Reverse Mortgage
Yes. There is a reverse mortgage for purchase option that allows qualified borrowers the ability to purchase a qualifying home by putting approximately 45%-62% of the purchase price as a down payment, then using the reverse mortgage for the balance. This means NO monthly payments in your new home for as long as the loan conditions are met. This is a great way to “Right-Size” into a better situation or the home of your dreams.
Where To Get A Reverse Mortgage
Two financial institutions offer reverse mortgages in Canada. HomeEquity Bank offers the Canadian Home Income Plan , which is available across Canada. You can get a reverse mortgage directly from HomeEquity Bank or through mortgage brokers. Equitable Bank offers a reverse mortgage in some major urban centres.
Shop around and explore your options before you get a reverse mortgage. Your financial institution may offer other products that might meet your needs.
Compare the costs of the following potential alternatives to a reverse mortgage:
- getting another type of loan, such as a personal loan, line of credit or credit card
- selling your home
- renting another home or apartment
- moving into assisted living, or other alternative housing
You may want to speak with a financial advisor and your family before getting a reverse mortgage. Make sure you understand how a reverse mortgage works and how it can affect your home equity over time.